A smoothly functioning banking supervision regime is one of the cornerstones of the infrastructure of any financial system. Only a stable financial system can optimally fulfil its macroeconomic function of efficient and low-cost provision of financial resources. Stability is therefore one of the key aims of state regulation and oversight. Supervisory law sets the rules that have to be complied with when setting up banks and carrying out banking business. The liberalisation of the financial markets has created new business opportunities for banks which may significantly amplify their risk situation. New risks necessitate new methods if supervisors are to prevent bank insolvencies. It is thus unsurprising that the liberalisation of the financial markets in recent years has led to developments in banking supervision.
The German Banking Act (Gesetz über das Kreditwesen) essentially forms the legal basis for the supervision of banking business and financial services, while the Payment Services Oversight Act (Zahlungsdiensteaufsichtsgesetz) is the legal basis for the supervision of payment institutions and e-money institutions. These acts seek to achieve the aim of safeguarding the functional viability of the financial sector by way of creditor protection while taking account of market economy principles. This means that the sole responsibility for business policy decisions remains with the managers of the institutions. Institutions' activities are restricted only by general qualitative and quantitative provisions and the obligation to open their books to the supervisory authorities. The intensity of supervision depends on the type and scale of the business provided. Banking supervisors do not directly intervene in the institutions' individual operations.
Ever since the introduction of general state banking supervision in Germany, the central bank has played a key role in supervision. The Bundesbank's involvement in banking supervision continues this tradition.